Financial Guidance to Help Your Business Succeed

Archive for December, 2012

Regarding Year-End: QuickBooks has been hard at work for the past 11+ months, recording and tracking and storing all of that financial data that you’ve entered so faithfully.

But when you turn the calendar page and make a new start January 1, your accounting software could use some closure on the year that’s just passed. Here are some actions you can take to ring out the old and ring in the new. There’s more you can do (we can help you with the advanced activities) but we’ll just hit the highlights here.

Reconcile, reconcile, reconcile. Yes, we know it’s not one of your favorite chores, but we really like to see all bank and credit card accounts reconciled by the end of the year if at all possible. Void all checks necessary and enter missing transactions.

Figure 1: You can make yourself crazy looking for a nickel when you’re reconciling but it’s a critical function.

Make accrual adjustments. This is complicated, and it only applies if you accrue payroll and liabilities or prepay expenses that are then carried as assets. We’ll need to create journal entries for you.

Close your books.This is totally optional. It depends on whether you want to lock 2012 data to everyone except those who have the password and permissions. If you don’t close them, you’ll have easier access to last year’s transaction details. Regardless of what you chose, QuickBooks will automatically make some year-end adjustments.

Do a physical inventory. Then compare this with what QuickBooks says. Reports | Inventory | Physical Inventory Worksheet.

Figure 2: It’s good to match up your physical inventory count with QuickBooks occasionally, and the end of the year is a good time as any.

Run income tax reports. As you know, QuickBooks lets you assign tax lines to tax-related transactions. Use the Income Tax Preparation Report and the Income Tax Summary Report. Let us know about any errors or omissions.

Check W-2 and 1099 data. You can’t create these forms, of course, until after your final 2012 payroll, but you can get a head start. Ask employees to verify their names, addresses and Social Security numbers for accuracy. Also, make sure that your EIN and SEIN are correct, as well as company address.

Clean up, back up. We can monitor the health of your QuickBooks data file anytime. But year-end is a good time to scrutinize your software’s performance. Has it slowed down, started crashing or returning error messages? We can troubleshoot to find the problem and clean it up. We’re sure you’ve been backing up your file faithfully, but archive all of 2012 and store it in a very safe offsite location — or use Intuit Data Protect for online storage.

Figure 3: Frequent backups are critical, but you should be sure to have a copy of your entire 2012 data file stored somewhere safe.

Double-check tax liabilities. If you’re handling your own payroll, look back to see whether all of your payments and filings have been completed.

Thanks for another year.

Again, these are suggestions. QuickBooks does not require you to do any of them. There’s more you can do, and you will need assistance with some of these. So let’s set up a early 2013 meeting to get you started right in the new year.

We want to take this opportunity to thank you for letting us serve your company in 2012. We certainly appreciate your business, and we’re happy to do what we can to help your business prosper.

P.S. It’s not too early to think about taxes so let us know if you want to get a jump on planning and preparation in January.

Do you worry that your heirs won’t have sufficient cash to pay estate taxes when you die? Or that your life insurance policy’s value might cause you to exceed your lifetime estate and generation-skipping transfer tax exemptions?

An irrevocable life insurance trust (ILIT) — which removes your policy’s proceeds from your taxable estate — is a potential solution. However, understand that, when you place a life insurance policy in an ILIT, you relinquish ownership and control. You appoint a trustee to handle tasks such as changing beneficiaries and making adjustments to the policy.

Another potential drawback: For your insurance proceeds to be excluded from your estate, you must live for three years after transferring the policy to the ILIT. However, the three-year rule doesn’t apply if you instead contribute funds to the trust and the ILIT purchases a new policy.

ILITs can be complicated, and they need to be set up properly by a professional. Talk with your financial advisor about whether an ILIT is appropriate for you or if another type of trust might better meet your needs.

In September, the Federal Reserve announced plans to keep the Fed funds rate at “exceptionally low levels” at least through mid-2015. So if you haven’t already refinanced your mortgage, you probably have time to weigh the decision.

Low rates are just one consideration. You also need to answer the following questions:

2. What’s your equity? To qualify for the best rates, you generally must have equity in your home of at least 20%. If your home’s value has dropped, you may need to make a lump-sum payment toward equity. And if you’re “under water” — you owe more on your mortgage than your home is worth — you may not qualify for refinancing at all.

3. How long do you expect to be in your home?Refinancing can lower your monthly mortgage costs, perhaps significantly, and the longer you remain in your home, the greater your overall savings. So if you move in the near term, you might not realize much benefit after you take into account closing costs — averaging more than $3,700 nationally on a $200,000 mortgage, according to a Bankrate.com survey.

4. What’s your mortgage rate?The lower your current rate, the less room you’ll have to reduce your payments by refinancing, and the longer it will take to make back the closing costs.

5. Is your mortgage rate adjustable?Adjustable rate mortgages can be risky because, when inflation rises, your mortgage rate will reset significantly higher. So you might benefit from refinancing to a fixed-rate loan, perhaps paying slightly more in the near term but locking in a historically low rate over the longer run.

6. How long have you had your mortgage?Refinancing restarts your debt clock. Weigh the benefits of lower monthly payments against the costs of starting from scratch with a new mortgage.

Alternatively, low interest rates might enable you to reduce your mortgage length — for example, by moving from a 30- to a 20-year mortgage. This may mean the same or slightly higher current payments, but it will allow you to substantially reduce your interest costs over the loan’s life.

Choosing a business structure, or entity, is an important decision that requires owners to consider several factors. The right structure depends on your circumstances, which may change over time.

3 Entities

One-person businesses often start out as sole proprietorships because they’re easy to set up and operate. But such structures offer no protection against personal liability. Partnerships don’t provide liability protection either — at least to their general partners. That’s why most established businesses operate as one of three entities: C corporation, S corporation or limited liability company (LLC).

All three structures limit their owners’ exposure to personal liability for their company’s debts and obligations. But they can differ greatly when it comes to flexibility, taxes and access to financing.

Flexibility and formalities

LLCs generally offer more flexibility than C and S corporations. They’re relatively easy to set up and have few restrictions and corporate formalities. Members have flexibility in the allocation of profits and losses.

By contrast, S corporations can’t have more than 100 shareholders (though most members of the same family are treated as a single shareholder) or more than one class of stock. Also, eligible S corporation shareholders are limited to individuals, certain trusts and tax-exempt organizations, and employee stock ownership plans (ESOPs).

Tax considerations

S corporations and LLCs are “pass-through” entities. This means that all of their profits and losses are passed through to the owners, who report their shares on their personal income tax returns.

But when it comes to self-employment taxes, S corporations may have an advantage: LLC members, unlike S corporation shareholders, may be subject to self-employment taxes on their entire profits, even if the profits aren’t distributed to them. However, S corporations must pay “reasonable” salaries to owner-employees, which are subject to self-employment tax.

C corporations have one distinct tax disadvantage: Their profits are subject to corporate income tax at the entity level and then to personal income tax when they’re distributed as dividends to shareholders. However, to the extent the C corporation is able to distribute profits in the form of salaries and bonuses (keeping in mind “reasonable compensation” restrictions), the deduction for wages paid eliminates double taxation.

C corporations also have some tax advantages. They may be able to deduct employee benefits — such as health reimbursement plans — for owners. Additionally, due to the graduated tax rates of a C corporation, a business may be able to build up and retain capital at a lower current tax rate than it would as an LLC or S corporation.

Attracting financing

S corporations can have trouble attracting equity investors because of limits on the number of shareholders and their inability to issue preferred stock. LLCs, on the other hand, are allowed an unlimited number of investors and enjoy the flexibility to create different types of interests to meet investors’ needs.

All types of business entities have access to bank loans. But banks may be more likely to ask for personal guarantees from S corporation shareholders and LLC members.

Planning and professional advice

Choosing a structure for your business is a complex process. But with planning and professional advice you can find the right entity for your needs.